The Minimum Wage

This morning, on NPR, they were interviewing a “Republican Millionaire”, who was arguing for a minimum wage of $12.00 an hour in California. His reasoning was that people will be willing to take a job for $12.00 an hour that they wouldn’t take at a lower wage rate, and that by taking the job, these people will move off the welfare rolls, thus saving taxpayers money! Great idea! Except for the fact that it’s moronic!

First of all, taxpayers are consumers, too, so an increase in the price of goods and services to cover the government-mandated increase in wage rates is a form of tax–on the same group of people that the “Republican Millionaire” claims his proposal would benefit.

Second of all, basic economics tells us that raising the price of some good or service lowers the demand for that good or service. The “Republican Millionaire” made the oft-argued statement that “studies” (what studies? when were they conducted? were the conclusions really what minimum-wage proponents claim?) have shown that raising the minimum wage doesn’t really decrease the available number of jobs. He states that California raised the minimum wage by 35¢ and that the unemployment rate actually went down. I think he said this was in 1995. Since he didn’t qualify that statement, I infer that he is arguing that the price for labor and the demand for labor move in tandem, rather than being inversely related, as is commonly thought. To reiterate, he implies (or, at least, allows the listener to infer) that if the price of labor rises, then the demand for labor also rises, and that if the price for labor falls, the demand for labor falls. He is, of course, incorrect. He admitted during the interview that he has not ever taken an economics course, so maybe he can be excused for being ignorant of the relationships among price, demand, and supply.

I have no reason to doubt (and I have little incentive to research the question) that California did raise the minimum wage, and that subsequently the unemployment rate fell. So, why would this situation occur if the price and demand of labor is inversely related? The most likely answer is that the minimum wage hike did not push the wage above the market rate. That is, if the “general market rate” for labor were higher than the minimum wage, all other things being equal, then one would not expect to see the unemployement rate affected. I put “general market rate” in quotes because, in the end, not all labor is the same. You can’t fire your accountant and hire a burger flipper to do your taxes and expect to get the same quality labor. So, a hike in the minimum wage would not affect all types of labor equally.

What it would do is price certain low-skilled laborers out of the market. If an employer is considering hiring a non-skilled worker and a skilled worker, and he must pay the same regardless of which he hires, then he has little incentive to hire the non-skilled worker. The government has effectively denied the non-skilled worker the use of his competitive advantage–underbidding his skilled rival for the job. In addition, one could expect that skilled workers would be willing to bid for a lower-stress job that pays the same or just a little less than his current job.

Another thing of which the “Republican Millionaire” seems to be ignorant is that there are players at the margin. He talked at some length about how Wal-Mart would only need to raise its prices by 1% to cover the minimum wage hike he proposes. However, he does not speak of (and may not even have thought of) the smaller firms that would not be able to absorb the wage hike. The firms, like the low-skilled worker, must often compete by charging lower prices for their goods or services. In order to charge lower prices, they must maintain lower costs. An increase in the cost of labor will likely push the firms operating with thin profit margins into bankruptcy. It will also induce the owners of some firms that remain profitable to close shop, if the owners feel they could make better use of their time and resources. The point is that competition will decrease, and when competition decreases, prices rise and the quality of goods and services fall. A minimum wage is actually a boon to the larger firms, since it eliminates the competition provided by smaller firms.

Now, I am aware that President Obama is urging Congress to increase the minimum wage, while he also is promising to use an Executive Order to compel firms that bid on government contracts to pay a minimum wage of $10.10. A national minimum wage would have the same effect, of course; just on a national scale.

In the end, a minimum wage is a bad idea. It is an unwarranted interference in the lives of people, because it prevents them from making arrangements that they feel is in their best interests. It misallocates resources by incentivizing firms and individuals to allocate labor to less productive uses. It is a boon to larger firms because it eliminates competition. It is anti-humanity, because it pushes people out of the workforce and makes them dependent on government largesse. It increases the cost of goods and services, even if the increase may seem negligible. It is a bad idea.